Keeping proper records

The importance of keeping proper records of all decisions and transactions in a trustThe Trust Property Control Act (TPA) 57 of 1988 lays down certain criteria that trustees should adhere to in their governance of a trust. These criteria, in conjunction with the duties the common law has laid upon trustees and good practice when it comes to running a trust as such, is of the utmost importance for each and every trustee. If the trustees do not follow the criteria as laid down in the TPA nor adhere to the duties imposed upon them by the common law and ignore best practice when it comes to acting in their capacities as trustees, the trust they are acting upon may be negatively impacted.

The ground rule as to how a trustee should act is set out in section 9(1) of the TPA, providing that, 'a trustee shall in the performance of his duties and the exercise of his powers act with the care, diligence and skill which can be reasonably expected of a person who manages the affairs of another.'

This rule sounds quite vague to the normal person in my opinion and doesn't substantively provide exactly what a trustee should do. To clarify, a trustee must always act for the benefit of the beneficiaries, whose affairs he is managing, by acting as trustee, regardless if they have vested or contingent rights. A discretionary inter vivos trust normally only provides that a beneficiary has a contingent right, meaning that they cannot demand that any trust asset be distributed to them, merely that the trustees may decide if and when such an asset may accrue to the beneficiary. While the trustee is acting in the beneficiaries' interest, he or she has to do so with care, diligence and skill. Now the question arises – how does a trustee act with care, diligence and skill? In my opinion this question can be answered by looking at a few of the more important duties laid upon trustees by the TPA and common law, especially the importance of keeping proper records of all decisions and transactions in a trust.

Section 11 of the TPA requires the trustees to indicate clearly in his or her bookkeeping the property that the trustee holds in his or her capacity as a trustee.

The practical implication of this requirement will be that the trustees appoint an accounting officer to see to the bookkeeping of the trust's accounts. Herein would be clearly indicated what assets or property the trust owns. For instance when the trust owns liquid assets such as furniture there would be proof that the trust bought the assets, or the assets has been sold or donated to the trust. A schedule listing these assets normally accompanies any agreement of sale or deed of donation thus proving the trust is the owner of the assets. Fixed property is registered at the deeds office in the name of the trust and thus serves as proof that the trust is indeed the owner of the assets.

Section 19 of the TPA imposes a duty on trustee to account to the Master of the High Court for the administration and disposal of trust property when requested to do so by the Master.

Section 16 of the TPA provides that a trustee must deliver any books or documents to the Master that are relevant in answering any questions put by the Master in connection with the administration and disposal of trust property.

Section 17 of the TPA provides that a trustee may not without the written consent of the Master destroy any document which serves as proof of the investment, safe custody, control, administration or alienation or distribution of trust property before the expiry of a period of five years from the termination of a trust.

All the above sections practically implies that all records of all transactions should be kept by the trustees as proof that such transactions was legitimately entered into by the trustees with the necessary authorization to act as such. In practice these records are normally in the form of resolutions drawn up with the substantive provisions of the decision or transaction noted signed by all the trustees. Even a resolution where one of the trustees is authorized to act on behalf of the trust in a certain transaction should be signed by all the trustees.

In the case Doyle v Board of Executors 1999(2)SA805(c) the court made it very clear that the trustees has a duty to account to beneficiaries regardless if the beneficiaries only has a contingent right, as contingent beneficiaries still has a vested interest in the proper administration of the trust.

In practice this doesn't mean that all beneficiaries should now be party to the decisions taken by the trustees, but that the trustees should be able to account for their decisions and the trustees should be able to provide the beneficiaries with proof of these decisions. Annual financial statements of the trust's accounts and resolutions of all decisions taken and transactions entered into will suffice as proof but in my opinion, in line with best practice, it is of the utmost importance to have yearly annual general meetings whose content is clearly noted in minutes and available to all relevant parties.

In Niewoudt and another NNO v Vrystaat Mielies (Edms)Bpk 2004(3)SA486(SCA) the court stressed the importance that all decisions of substance regarding a trust should be reached unanimously by the trustees as trustees is technically jointly in control of trust assets.

In practice all trustees unanimously take decisions regarding the trust. Even when one trustee is acting on behalf of the trust in a certain transaction or series of related transactions the trustees has unanimously agreed to empower the trustee so selected to act as such, thus the trustees are still acting unanimously.

In my opinion where trustees adhere to the principles set out above and always act in the way prescribed in section 9(1) they are in fact keeping proper records and the administration of the trust is up to date. This begs another question – what could happen if the trustees do not adhere to these principles? Two important cases that spring to mind are the Badenhorst and Parker cases.

In Badenhorst v Badenhorst 2006(2)SA255(SCA) the court granted a redistribution order in terms of sec7(3) of the Divorce Act 70 of 1979 applicable to assets held within a trust created during a marriage as the court found that the trustee was acting in his capacity as trustees, as such, to his own interest as if the trust was part of his own estate. Thus the trust assets were also dealt with as if they were part of his estate.

In Land and Agricultural Bank of South Africa v Parker 2005(2)SA77(SCA) the court found any transaction entered into by a sub-minimum amount of trustees as described in the trust deed to be unlawful. Thus, where trustees were not authorized to act without the consent of all the trustees, the transaction would not be allowable that was entered into.

It is thus very important as trustees to make sure the administration of the trust is done correctly and is up to date – remember ignorance is not a defense in the eyes of the law!